propensity to consume is .9, investment demand is $900 billion, government spending is $600
billion, and lump-sum taxes are $660 billion per year. Let exports be equal to imports at $500
Now suppose that exports surge by $125 billion. The government is worried about the effects on
inflation because the economy is already above potential GDP, so it contemplates different plans
to offset the effects of the surge in exports.
A. What will the government have to do to taxes (raise or lower, how much) in order to offset
the effect on GDP of the surge in exports?
B. What would the government do if it wanted
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